Sunday, May 26, 2013

What's with the furniture business?

Over the last few days, I have looked (and looked again) at several companies, namely Latitude Tree, Lii Hen, Classic Scenic and Homeritz. Each and every one of the above has its own uniqueness and differences. Latitude's main customers are in United States with about 93% of its business derives from there. Lii Hen's customer base is very much US as well, but its main manufacturing is still in Malaysia. Latitude has very much moved to Vietnam taking opportunity of the low costs.

Classic Scenic on the other hand is a picture frame manufacturer, doing very well to maintain its margin as well as growth. Homeritz, which was the latest to get listed in much more in the upholstery business. It has been on the profit track record over the last 5 years, but the trend was not that consistent.

Among the four, Classic Scenic is probably the most consistent, but in terms of revenue it is probably the smallest. Market capitalisation though it is the highest - about RM131 million. The consistency as well as the dividend payment probably reward the company much more than its other peers. It is now trading around 10x its trailing 12 months income.

Now, what is pretty surprising is that besides Classic Scenic, the rest are trading at their low single digit PEs. Both Latitude Tree and Lii Hen are around 4x, while Homeritz at around 5x. See all below.

Homeritz stock details

Latitude Tree as I have previously written about and invested myself, is still trading at around market capitalisation of RM83.6 million while its book value is higher than RM200 million. The Price / Book is 0.4x.

Latitude Tree's stock details

These are companies which provides dividends, and all of them provides dividend yield of more than 4%. All of them have pretty good cashflows, they have low receivables to turnover. Debt are very manageable. Despite the competitiveness, the business cannot go much lower anymore as both US and Europe are picking themselves up. The exchange rate is not to the favour of the export led furniture industry. If you notice though, the business is seeing pick up especially for both Latitude and Lii Hen where their market are very much United States. You can read all kinds of report on the US housing market, they are making a return, slowly but surely. It will definitely be positive for companies which have direct and indirect exposure to the industry.

Stock details of Lii Hen

All in all, we can have our apprehensiveness, but what is with the low valuation? The business is pretty cyclical within the year (due to seasonality where close to Christmas period is usually better) as well as over the years (due to costs, demand and fluctuations of exchange rates). But I am hoping to take opportunity by catching the lows. Seldom do I time the market, but in this case, I am just looking at the valuation and hoping for the pick up in sales and margins.

If one has fear as what happened to companies like Kimble and Kenmark, I think the balance sheet as well as their cashflows would have buried that fear. And they are audited by renown auditors - Latitude by EY, Classic by KPMG, Homeritz by Crowe Horwath, while maybe the auditor - John Lim and Associates - which I am not too comfortable is the one hired by Lii Hen.

If one has fear over timber industry, I can understand as it is susceptible to boycotts over Malaysian timber once a while, but for furniture, I do not see that.

I do not want to expose myself too much with this industry but their valuations are way too ridiculous for me to stay away from.

4 comments:

I was looking at CS recently. I like companies with high DY. Ha. Some of my observations are:

- ROE ~10% (high but below my target of >15%)- FCF/sales at 15-35% over the last 7 years (good in the economic moat sense, consistent FCF/sales >5% suggesting some economic moat) Incidentially, I would look for another indicator to support rather jumping in and say it has an economic moat.- negative returns for capital & dividends in the past 4th to 7th years but positive returns for the past 3 years and hopefully continuing from here on- historical EPS not growing steadily

There is a lot of stock that could offer 4% steady dividend yield. I'd rather choose one that is strong (safe) and continue to grow. One of the short coming of investing into these "boring" company doing "cyclical" business is you might need to spend a lot of time waiting. While you're doing so, a dividend stock may have progressed well in EPS and dividend per share, and its share price follows. Something may look attractive, but if it can't talk you into pouring out of considerable percentage of your money in it, it is useless.

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